A Trump-era limit on state and local tax deductions could be in store for a last-minute overhaul, meaning millions of Americans may receive fatter tax refunds this year.
The so-called SALT deduction cap, which is poised to sunset in 2026, limited the amount of state and local taxes that Americans can deduct from their federal taxes to $10,000 as part of former President Donald Trump's signature tax law.
But a new proposal would raise the cap to $20,000 for married couples who file their taxes jointly and make up to $500,000. The break would only apply to the 2023 tax year and then would revert to the previous $10,000 limit until it expires in two years.
Before Republicans capped the SALT deduction as part of the Tax Cuts and Jobs Act in 2017, taxpayers were able to freely deduct their state and local taxes from their federal taxes, helping them to offset some of their liability. Many critics argued the deduction disproportionately benefited wealthy homeowners in states with high taxes, like New York, California and New Jersey.
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But there has been a growing chorus of lawmakers who say the cap hurts middle-class homeowners living in regions with steep property taxes. They also have criticized the limit as a "marriage penalty" because the limit is the same for single and joint filers.
House lawmakers are currently considering the bill – dubbed the SALT Marriage Penalty Elimination Tax – and are expected to vote on it sometime this week. If it passes, the bill would then head to the Democratic-controlled Senate.
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"This is a pro-family tax measure that rights a wrong, and this ultimately is about fairness," said Rep. Mike Lawler, a New York Republican who introduced the bill.
The current tax filing season began on Jan. 29.
If the bill is passed into law, it would require taxpayers or the IRS to adjust already-submitted tax returns. Most taxpayers will have until Monday, April 15, to submit their returns or request an extension this year.
But recent findings published by the Committee for a Responsible Federal Budget, a nonpartisan organization that advocates for lower taxes, show that the temporary increase in the SALT cap would cost about $11.7 billion for one year, with the vast majority of that – about $9 billion – going toward those who make more than $200,000 a year.
Taxpayers who earn less than $100,000 would "see nearly no benefit from the SALT cap," said Garrett Watson, senior policy analyst and modeling manager at the Tax Foundation, in a blog post. Just about 1.3% of the total tax change would go to taxpayers earning less than $100,000, while about 77% of it would go toward those earning more than $200,000.
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"While the bill would offer incremental relief, it would increase the budget deficit, create a new cliff in the tax code and mostly benefit higher earners, all without improving long-run economic growth," Watson said.
